[gizmo]

1) Chris claims "The fact of the matter is that HFT’s can’t rip you off.". Front-running[1] is an example where HFT's do rip people off, simply because they didn't know it was going on. When the performance of institutional investors is harmed in this way that harms everybody with savings or a retirement fund. Not just the guys at wall street.

2) Straw man.

3) Yes, while we're at it let's change the subject to photo sharing websites instead. That sounds reasonable.

Edit:

[1] Again referring to the technically legal version of "front running" as used by Michael Lewis where HFT abuse buy/sell orders arriving at different times at the exchanges.

[throwaway13qf85]

Front-running[0] is where a stockbroker abuses the relationship they have with a client to place their own order in front of a client's order, because they know that the client's order will move the market, and that subsequently they'll be able to close their own position at a profit.

Having a speed advantage over other market participants and using that advantage to pull your quotes on another exchange is not front-running! It's just sensible market-making, of the kind that has been doing on for hundreds of years. It's no better or worse than sending a pigeon over the English Channel in 1815[1], or using the Transatlantic Telegraph to outpace ships in 1866.

Also, shouting "straw man" is not actually an argument.

[0] http://en.wiktionary.org/wiki/front_running#English

[1] http://en.wikipedia.org/wiki/Nathan_Mayer_Rothschild#Legend

[001sky]

Front running is a conceptual variation of the hold-up problem. Like any concept, it can be implemented in plain-vanilla as well as syngthetic variants. Non-vanilla is not dispositive.

[yummyfajitas]

When you tell a broker "trade on my behalf" and he trades first, that's front running because he is obligated to do what's best for you. Other market participants do not have the same duty.

To make an analogy: my boxing coach is obligated to give me good advice and he's a jerk if he doesn't. The other boxer is not being a jerk if he feints and then punches me in the face.

[fauigerzigerk]

And what if your broker routes your order through an HFT for a fee so the HFT can front-run you? That's what some say is happening. I'm still unclear if I can really believe that because it sounds so obviously illegal.

[yummyfajitas]

Retail brokers often have ELP programs where an HFT has the option to fill your order (and the obligation to do so a certain fraction of the time, typically 20-50%) and avoid paying routing fees.

There is little opportunity to front-run in this case since a) no one on ETrade moves large blocks b) ETrade wants to make sure the ELP program is full of benevolent market makers and c) fill rate requirements. You can always opt out of these programs (turn off "smart routing" or something similarly named), but most people don't since they typically reduce your costs.

[kasey_junk]

That's what I was hoping Flashboys was going to be about. I haven't finished the book yet but so far Lewis mentions it in passing but doesn't dig into it.

[rayiner]

> 3) Yes, while we're at it let's change the subject to photo sharing websites instead. That sounds reasonable.

The question: "does Facebook spying on teenagers to help Abercrombie & Fitch sell them crap they don't need add social value commensurate with how much money they make doing it?" isn't an attempt to change the subject, but rather a glib attempt to criticize the structure of the question. Since when do we judge compensation based on value added to society, and if that's what we do, why don't we apply that approach beyond finance?

[gizmo]

I disagree. It is an attempt to change the subject from the object level: "is HFT harming society and do we need more transparency or regulation" to the meta level: "if we have to do something about HFT, then why not address X, Y, Z also?".

It's not a legitimate argument because it can be used to derail any conversion that criticizes one particular aspect of society.

It goes without saying that there are moral questions to be raised about facebook acquisitions and compensation in fields outside of finance. But it's not part of this conversation.

[rayiner]

That's not the argument. The argument is: "if this mode of reasoning is valid, and pursuant to it we must do something about HFT, then we would also feel compelled to do something about X, Y, and Z as well. But because we don't feel compelled to do something about X, Y, and Z, that implies that the mode of reasoning is not valid."

In other words, he disagrees with the premise that compensation need bear some relation to economic value created. Empirically, that's a premise that we as a society reject.

[kasey_junk]

See I think the question "is HFT harming society and do we need more transparency or regulation" is much clearer and easier to debate about than "does HFT make more money than it's value to society".

When we have that debate I'd like it to be informed about what does and does not actually happen with HFT and not bogeyman scare stories. I'd also like that debate to consider the pro's and con's of the system it replaced and the unintended consequences of any regulation we introduce.

[hsitz]

"Since when do we judge compensation based on value added to society, and if that's what we do, why don't we apply that approach beyond finance?"

We apply it in finance for a couple reasons. Securities exchanges are high regulated entities, at least since the Great Depression brought our country to its knees. Ever heard of the SEC, which exists to protect investors? There is no reason for HFT to be allowed at all unless it is creating a net benefit for society. Or said another way, if HFT provides a benefit only for the people doing HFT, and has a negative effect on others, then there's no reason to allow it. (An aside: My understanding is that studies have shown markets to have plenty of liquidity without HFT.)